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 In  order  to  make  the  pricing  methodologies  more  compatible  with  the  current  valuation practice,  the Reserve Bank of India  has  issued  the Notification Number FEMA 205/2010 (“the New  Notification”) on April 5, 2010 which shall come into force  with effect from April 21, 2010.

 The  New Notification  aims  at  providing  more  clarity  on  the  pricing  of  shares issued by an Indian company to Non Residents and also brings with it an array  of  questions which would need  clarification to  make  the  guidelines  fully  effective.    


The salient features of the New Notification are enumerated below.  I have  tried  to capture the difference  between  the  regulations  as  they exist now vis-à-vis after  the  issue  of  the New Notification.  




Current position  


The  current provisions  state  that  an  Indian  company  must  issue  shares  to  non  resident investors  at  a  minimum  price  which  should  not  be lower  than:  


Valuation  Criteria

Valuation  Method

For  Companies  whose  shares  are  listed  on  a recognized  stock  exchange  



Price worked  out  in accordance  with  the  applicable Securities  and  Exchange  Board  of India  (‘SEBI’)  guidelines

For  Companies  whose  shares  are  not  listed  on  a recognized  stock  exchange  

Fair  valuation  of  shares,  which  is required  to  be  undertaken  by  a Chartered  Accountant  to  determine the  price  in  accordance  with the erstwhile  Controller  of Capital Issues  (‘CCI’)  Guidelines  





Provisions specified under the New Notification  


The  New Notification  now  mandates  that  the price on  issue  of  shares  by  an  Indian  company  to  a non  resident should  not  be  lower  than:


Valuation  Criteria

Valuation  Method

Change  from  existing  provisions

For  Companies  whose  shares listed on  a  recognized  stock  exchange  


Price worked  out  in accordance with  the  applicable  Securities and  Exchange  Board  of  India (‘SEBI’)  guidelines  

No  Change  

For  Companies whose shares  not listed  on a recognized  stock exchange  

Fair  valuation  of  shares required  to  be undertaken  by a  SEBI registered  Categoryâ€I Merchant  Banker  or  a Chartered  Accountant,  in accordance  with  Discounted Free  Cash  Flow  (‘DFCF’) method  

·      SEBI category merchant bankers  can  also carry  out  the valuation  in addition  to Chartered Accountants  


·      DFCF  method  of valuation  replaces the CCI  guidelines 


Preferential  Allotments  

Price  as  computed  under transfer  of  shares  from resident  to  non  resident in accordance  with  the  RBI guidelines  issued  from time  to  time.  


RBI has  not  prescribed  any  new  guidelines  in  this  relation.  As  per  the  current  regulatory  framework,  the  CCI  guidelines  are  to  be  applied  for  transfer  of  shares  of  Indian  unlisted  companies  from  Indian  residents  to  nonâ€residents.  


Author’s Insights 


The  CCI  guidelines  for  the  valuation  of  shares  of  unlisted  companies  use  conservative method  of  valuation  by  considering  an  average  of  the  Net  Asset  Value  (‘NAV’)  of  the company  and  the  company’s  Profit  Earning  Capacity  Value  (‘PECV’),  which  was  arrived at  based  on  its  past  financial  performance.  Whereas  the  notification  instead  specifies DFCF method  which  is  based  on  future  free  cash  flows.  Since the valuation of shares  is  a future  oriented  practice,  DFCF  method  is  more  appropriate  as  compared to CCI Guidelines.  Also  price  to  be  computed  using  the  DFCF  method  would  normally  be  higher than  that  computed  under  the  erstwhile  CCI  guidelines.  




Current Position 


The  FEMA  regulations  required  that  if  an  Indian  company  issues  shares  by  way  of  right issue  to  a  non  resident  then  the  price  of such  shares  should  not  be  less  than  the  price  at which  such  offer  of  right  issue  is  made  to  an  Indian  resident  investor.  


Provisions specified under the New Notification  


The  New Notification  now  mandates  that  in  case  of  right  issue  of  shares  by  an  Indian company  to  a  non  resident  the  price  should  not be lower  than:  


Valuation  Criteria

Valuation  Method

For  Companies  whose  shares  listed  on  a recognized  stock  exchange  


Price as  determined  by the  company  

For  Companies  whose  shares  not  listed  on  a recognized  stock  exchange  


Price  at  which  such  offer  of  right issue  is  made  to  Indian  resident investors


Author’s Insights  


The  New Notification  gives  more  realistic  approach  to  the  pricing  of  right  issue.  Now the price  of  the  right  issue  of  listed  shares  would  be  determined  on  the  basis  of  prices  of such  shares  at  the  time  of  issue,  which  gives  more  appropriate  basis  of  pricing.  


Grey Areas  


Some areas have been left untouched by the New Notification and require greater clarity from the government:


·                     In relation  to  pricing  of  shares,  the  New Notification  defines  three  methodologies;  it is unclear  whether  these  methodologies  are  to  be  read  independently  or cumulatively.  


·                     The  meaning  and  scope  of  a  preferential  allotment,  particularly  in  the  case  of  a private  limited  company  is  not  spelt  out  and  consequently  the  treatment  of  cases that  would  not  qualify  as  a  preferential  allotment  is  also  unclear.  


·                     The  status  of  the  applicability  of  pricing  guidelines  on  share  application  money received  but  pending  allotment  on  the  effective  date  of  notification  is  not  clear.  




The Author is Chartered Accountant and a licentiate Company Secretary and is a Partner with NMA, a boutique CA Firm.  He has more than 8 years of experience in Tax and Regulatory matters and has also worked with Deloitte Haskins & Sells.  Nirav is also a Lead Advisor to Promaynov (www.promaynov.com), a firm engaged in providing executive training and mentoring programmes to CAs and Lawyers which helps the participants get through BIG4s, MNCs and top Law Firms. 






Published by

Nimish Goel
Category Corporate Law   Report

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